Valuing a private company
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
8 min read · updated October 14, 2026
A founder has spent twenty years building a business. She has no bankers, no analysts, no share price. One day she asks you: "what is my company worth?"
That's a real question bankers get, and a favorite interview question, because it tests whether you understand valuation or have only memorized it. The methods are the same three you'd use for a public company. What changes is that every input you're used to reading off a screen is missing or unreliable, and you have to rebuild it.
Start with two questions back
Before any numbers, ask what the valuation is for and what's being valued. A good answer in an interview starts here, and it's what a senior banker would actually do.
- What's the purpose? A sale to a buyer, a minority stake to an investor, bringing in a partner, estate planning, a shareholder dispute. Each implies a different standard. A buyer of the whole company pays for control. A minority investor gets no control and no easy exit.
- What's the stake? Valuing 100% of the business and valuing a 10% piece of it are not the same exercise per dollar of earnings. The 10% stake can't direct the company and can't easily be sold.
For the rest of this lesson, assume she's thinking about selling the whole company.
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Frequently asked
- How do you value a private company?
- With the same three methods as a public one, comparable companies, precedent transactions and a DCF, each adjusted. First clean the earnings, because owners run personal costs and their own pay through the business. Then apply public multiples with a discount for smaller size and the lack of a liquid market. In a DCF, build the cost of equity from public peers' betas plus premiums for size and company-specific risk, since the company has no beta of its own.
- What is a discount for lack of marketability?
- It is a reduction in value because a private stake cannot be sold quickly or easily. A public share can be sold in seconds; a minority stake in a private company might take months to find a buyer, if it can be sold at all. That illiquidity is worth less, so valuers often apply a discount, commonly cited in the range of 15% to 30%, especially to minority stakes.
- How do you calculate a cost of equity for a private company with no beta?
- Borrow a beta from public peers. Take their levered betas, unlever each one using its own debt to equity ratio, take the median, and relever it at the private company's target capital structure. Run CAPM with that beta, then add a size premium and often a company-specific risk premium for things like customer concentration or dependence on one person.
- What are owner's adjustments to EBITDA?
- Changes that show what the business would earn under a new owner. Common ones: add back the part of the owner's salary above what a hired CEO would cost, personal expenses run through the company, and one-time costs like a lawsuit; deduct costs the business is not paying at market rates, such as rent on a building the owner owns and leases to the company cheaply.
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